Consultation on the enduring regulatory framework for NESO

What this is about

Ofgem is opening the design of NESO's first post-RIIO-2 regulatory framework, covering the business plan cycle that starts on 1 April 2026. This is the third and final stage of a phased approach. Day 1 of NESO (October 2024) settled the most urgent governance and licence questions. Business Plan 3 (BP3, April 2025 to March 2026) ran as a transitional one-year plan inside the dying RIIO-2 framework. From April 2026, NESO needs a steady-state regime that is no longer borrowed from the price control built for the old ESO inside National Grid.

The consultation matters because NESO is structurally different from the entity Ofgem used to regulate. It is publicly owned, it has a wider statutory remit covering whole-system planning, strategic spatial planning, and gas, and its outputs are advisory and analytical rather than capital-intensive. A RIIO-style framework designed to discipline a private monopoly's capex programme does not fit. The May 2025 paper is where Ofgem exposed the trade-offs in cost recovery, performance incentives, business plan length, and the role of stakeholders. The December 2025 decision document settled them. Reading this consultation tells you which options were live, who pushed which way, and where Ofgem moved or held the line.

Options on the table

The consultation document sets out Ofgem's preferred direction across several design choices. The source extract above is the GOV.UK landing page rather than the full PDF, so the option set below is reconstructed from what Ofgem flagged in the framing and from the surrounding documents (BP3 decisions, the Future System Operator policy direction consultation, and the December decision). Treat the specifics as inferred from the consultation's structure rather than verified line-by-line against the 489 KB PDF.

Business plan length

The transitional BP3 ran for a single year. The enduring framework needs to choose how long future plans run for. The candidates are a short cycle (2-3 years), a medium cycle (5 years matching RIIO precedent), or a rolling plan with periodic reopeners. Short cycles reduce forecast risk and let Ofgem revisit cost allowances as NESO's remit expands, but they load both parties with continuous planning overhead. Longer cycles give NESO room to invest in capability and stakeholders certainty about funding, but they require credible uncertainty mechanisms because the system operator's workload is being reshaped by connections reform, REMA, strategic spatial planning, and the gas transition all at once. Who wins from a short cycle: Ofgem and consumers, who keep tighter control. Who wins from a longer cycle: NESO and its supply chain, who get planning headroom.

Cost recovery model

NESO is not a network company with a regulated asset base. Most of its costs are people, systems, and analytical capability. The consultation tests how to fund this. Options range from a pure pass-through of efficient costs (Ofgem reviews, NESO recovers), through a totex-style allowance with sharing factors, to a hybrid where core operating costs pass through and discretionary or innovation spend sits inside an ex-ante allowance with incentives. Pass-through is administratively cheap but gives NESO no efficiency pressure. Totex-with-sharing creates efficiency incentives but is borrowed from a capex-heavy regime that does not map cleanly to an analytical body. The hybrid is where Ofgem is most likely to land because it isolates the parts of NESO's spend where benchmarking is feasible. Winners and losers track the sharing factor: a high consumer share of underspend protects bills, a high NESO share sharpens internal cost discipline.

Performance incentives framework

Ofgem already decided BP3 performance incentives in a separate decision (linked from the landing page). The enduring framework has to decide whether to keep that structure, expand it, or rebuild it. The live questions are which roles to incentivise (system operation, market facilitation, strategic planning, advisory outputs to government), how to measure performance on outputs that are mostly advice rather than physical delivery, and how much financial risk to put on NESO given that it is publicly owned and cannot meaningfully be "punished" in the way a private monopoly can. Stakeholder satisfaction surveys, delivery against milestones, and quality assessments by independent panels are the usual tools. Each has known weaknesses: surveys can be gamed, milestone delivery rewards activity not value, and panels are expensive and politically exposed. Who wins from light-touch incentives: NESO. Who wins from heavy incentives: stakeholders who want NESO's discretion constrained, particularly the connections queue cohort and large generators frustrated by current FES and pathway choices.

Treatment of NESO's wider remit

NESO inherited gas system operation, took on strategic spatial planning under the SSEP, and is becoming the central counterparty for connections queue reform. The consultation has to decide whether to fund these activities inside one consolidated framework or to run separate cost categories with their own governance. A single framework is administratively simpler and lets NESO move resource between functions. Separate categories give Treasury and Ofgem clearer line-of-sight on what each function costs, which matters because some of these functions (strategic spatial planning, REMA implementation support) are quasi-policy work that may sit uneasily inside a consumer-funded regulatory framework. Winners from consolidation: NESO management. Winners from separation: Treasury, DESNZ, and any future scrutiny of whether consumer levies are funding work that should be on the departmental budget.

Stakeholder engagement and challenge mechanisms

RIIO networks have customer challenge groups and independent user groups baked into their business plan process. NESO does not yet have an equivalent. The consultation tests whether to import that model, design something lighter, or rely on Ofgem's own scrutiny. A formal challenge group adds cost and risk of capture by organised interests (large generators, suppliers, lobby groups) but creates a public record of who pushed back on what. A lighter model preserves Ofgem's authority but means stakeholder concerns surface only through consultation responses, which is a thinner channel. Winners from formal challenge groups: organised industry interests with the resource to participate. Losers: dispersed consumers and small entrants who lack representation.

Questions being asked

The landing page extract does not reproduce the numbered consultation questions, which sit inside the 489 KB PDF. Based on the document's scope, the questions cluster around the themes below. Specific question wording would need to be checked against the PDF.

Framework architecture

- Do you agree with Ofgem's proposed phased approach to implementing NESO's enduring regulatory framework? [Asking whether respondents accept the multi-stage transition rather than a single big-bang reset.] - What is the appropriate length for NESO's business plan cycles from April 2026 onwards? - How should uncertainty mechanisms (reopeners, pass-throughs, use-it-or-lose-it allowances) be structured?

Cost assessment and recovery

- How should Ofgem assess the efficient level of NESO's operating costs? - Should there be a totex-style allowance with sharing factors, full pass-through, or a hybrid? - What benchmarking approach is appropriate for an analytical and advisory body without close peers? [Asking how Ofgem can challenge NESO's cost forecasts when there is no comparator network.]

Performance incentives

- Which NESO outputs should attract financial incentives? - How should performance be measured for advisory and analytical functions? - What is the appropriate balance of upside and downside financial exposure for a publicly owned body? [The honest question is whether financial incentives mean anything when NESO cannot be allowed to fail and its returns flow back to the public purse anyway.] - Should stakeholder satisfaction surveys remain a primary performance measure?

Scope and funding boundaries

- Should NESO's expanded functions (gas, SSEP, connections reform) sit inside a single consolidated framework or in separate cost categories? - Where should the boundary sit between consumer-funded regulatory activity and activity that should be funded directly by government? [Asking, in effect, whether SSEP and REMA implementation work are properly chargeable to electricity bills.] - How should NESO's costs be allocated between electricity and gas consumers?

Governance and challenge

- Should a formal customer challenge group or user committee be established for NESO? - What role should independent assurance play in NESO's business plan development? - How should Ofgem balance its regulatory oversight against NESO's operational independence and statutory duties to government?

Transition and timing

- Are the proposed transition arrangements from BP3 to the enduring framework workable? - What lessons from BP3 should be carried into the enduring framework? - How should the framework accommodate further changes to NESO's remit during the business plan period?

How to respond

The consultation has already closed. The headline dates from the source:

- Published: 27 May 2025 - Closing date listed on the page: 9 July 2025 (the body text says 8 July 2025; the page header is the operative date) - Status: Closed (with decision) - Decision: Decision on the enduring regulatory framework for NESO (December 2025)

Original submission route, for reference:

- Email: NESORegulation@ofgem.gov.uk - Contact: David Beaumont, 0207 901 7000 - Accepted formats: PDF, Word, Excel. Confidential responses to be clearly marked. - Main document: Consultation on the enduring regulatory framework for NESO [PDF, 489 KB] - Stakeholder responses: Published as a ZIP archive (4.36 MB) on the consultation page

For anyone reading this now, the value is in the stakeholder response pack and the December 2025 decision. The response ZIP shows which positions industry, consumer groups, and NESO itself took on each design choice. The decision document shows where Ofgem moved from its May proposals and where it held firm. Reading the two together is the fastest way to understand what the April 2026 framework will actually look like and which arguments lost.